Rallying Japanese shares boost Asia ahead of US data

Japanese shares led Asia higher on Tuesday with the yen on the back foot, ahead of a slew of data this week, including on U.S. inflation, which will help investors gauge the Federal Reserve's policy outlook after volatile markets last week.

Oil prices eased after a 3% jump on Monday as investors kept a wary eye on the risk of a widening conflict in the Middle East that could pinch global crude supplies. Demand for safe-haven assets lifted gold, although they slipped a bit on Tuesday.

Japan's Nikkei rose more than 3% following a holiday on Monday, a welcome relief after last week's wild swings that began with a massive sell-off spurred by a rising yen and fears of a U.S. recession.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.15% to 556.55. Chinese stocks edged down while Hong Kong's Hang Seng Index ticked up 0.1%.

European stock markets were due for a higher open, with the Eurostoxx 50 futures up 0.3% and FTSE futures 0.26% higher.

"While aftershocks might reveal vulnerabilities, we continue to view recent volatility as being an equivalent of a 'heart palpitation' not a 'cardiac arrest'," Viktor Shvets, head of global desk strategy at Macquarie Capital said in a note.

"We also maintain that the nervousness about a U.S .slowdown is overdone."

However, investor sentiment remains fragile. The yen dropped 0.34% to 147.72 per dollar on Tuesday, having touched a seven-month high of 141.675 on Monday last week, a far cry from the 38-year lows of 161.96 it was rooted to at the start of July.

A Bank of Japan rate rise last month following bouts of intervention from Tokyo earlier in July wrong-footed investors and led them to bail out of popular carry trades, which use the currency of a low-rate market to fund investments with higher returns.

The latest weekly data to Aug. 6 showed that leveraged funds - typically hedge funds and various types of money managers - closed their positions in the yen at the quickest rate since March 2011.

Given the yen's recent rally, dollar-yen is now more in sync with its yield differential, according to Karsten Junius, chief economist at Bank J. Safra Sarasin.

"Another wave of the yen-funded carry trade unwind will likely push the yen still somewhat higher towards year-end. Yet we do not expect USD-JPY to fall meaningfully below 140."

In commodities, Brent crude futures eased 0.67% to $81.75 a barrel, while U.S. West Texas Intermediate crude futures slipped to $79.59 a barrel, down 0.59%. Brent had gained more than 3% on Monday, while U.S. crude futures had risen more than 4%.